Health insurance for dummies: Why we cover pre-existing conditions

The Trump administration this week issued a final rule on “short-term, limited duration insurance” that critics say will only make things worse for sick people. (Getty Images)

It never fails to astonish that the biggest critics of Obamacare seem to have no clue how insurance works.

They wrap their criticism in high-minded declarations of “choice” and “personal freedom,” but the bottom line is that insurance — all insurance, not just health coverage — is a tool for risk management, and there are smart, efficient ways to do that and stupid, expensive ways to do it.

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Conservatives by and large have picked stupid and expensive as the way to go.

The Trump administration this week issued a final rule on “short-term, limited duration insurance” that officials say will invigorate the market with more options.

In reality it will undermine overall coverage with cheaper, less-comprehensive policies that will make things worse for sick people.

Not least among the problems with these “short-term” policies, which in fact can last up to three years, is that they once again allow insurers to deny coverage or charge higher prices to people with pre-existing conditions.

“Health insurance markets work best when the risk pool is broad, because ultimately everyone gets sick or injured, often through no fault of their own,” said Gerald Kominski, a senior fellow at the UCLA Center for Health Policy Research.

“Segmenting the market by health status provides a benefit while you’re healthy, then penalizes you when you get sick and need insurance the most,” he told me.

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Full disclosure: I’ve got a big, honking pre-existing condition — Type 1 diabetes — so I’m not an innocent bystander. Prior to passage of the Affordable Care Act in 2010, I was uninsurable in the individual insurance market if, God forbid, I lost my employer-based group coverage.

I’ve been asked by conservatives on more than one occasion what I assume is a well-meaning (although sadly ignorant) question: “Why should I have to pay for your healthcare?”

The answer, of course, is the same reason you pay to help protect my home from fire and my car from accidents — because I’m helping pay for your home and your car.

“You’re also paying for my national defense, and believe it or not, you or a close family member will be sick one day,” said Dana Goldman, director of USC’s Schaeffer Center for Health Policy and Economics.

It seems ridiculous that it has to be spelled out, but apparently lots of conservatives decided to skip class when the topic of insurance came up in Econ 101.

As a risk-management tool, the entire system is predicated on the idea of spreading potential danger as widely as possible — that is, among the greatest number of policyholders — to provide the best possible coverage at the lowest possible price. The more people in the risk pool, the lower everyone’s costs.

“Anything that expands the risk pool is welcome,” said David Dranove, a professor of health industry management at Northwestern University's Kellogg School of Management.

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He said asking why you should pay for someone else’s healthcare “is like asking for a refund on fire and police protection because we didn’t need it last year.

“We can’t fund these things after the fact,” Dranove observed. “We have to pay in advance, before we face these risks. That is the whole point of insurance.”

Even so, these basic economic principles seem lost on conservatives in general and the Trump administration in particular.

Yes, these skimpier short-term policies will be cheaper than coverage available through Obamacare exchanges, and, yes, that will undoubtedly be very appealing to younger, healthier people who believe they have no need for more comprehensive plans.

But the end result is that you’ve now splintered the risk pool, with the young and healthy banding together for more affordable insurance, and older or sicker people suddenly stuck with higher costs because they now represent a greater risk to insurers.

“It benefits people who are currently healthy, until they get sick, for example, with a chronic illness,” said UCLA’s Kominski. “Then they may find themselves priced out of the market, or unable to get insurance at any price.”

The White House estimates that premiums for short-term plans could run as little as a third of the cost of the more substantial coverage available through the Affordable Care Act.

“For many who’ve got pre-existing conditions or who have other health worries, the Obamacare plans might be right for them,” Health and Human Services Secretary Alex Azar said on Fox News. “We’re just providing more options.”

This is a shockingly thick-headed thing for the country’s top health official to say. More options in this case mean higher costs for people with medical needs.

The Trump administration, in its eagerness to showcase the no-frills omelet it just cooked, is ignoring all the broken eggs it dropped on the floor and the sink full of dirty dishes.

We’re pandering to shortsighted people who place self-interest before the interests of society. And the cost to the country is potentially enormous as higher premiums for the sick compel some people to forgo coverage or skip treatment.

This in turn can lead to a surge in medical-related bankruptcies and to more people turning to emergency rooms for care — by the far the most expensive way of delivering healthcare, which can drive up premiums for everyone.

Meanwhile, 20 Republican-led states are challenging Obamacare in federal court, demanding that the law’s protections for people with pre-existing conditions be declared unconstitutional.

In an act of stunning pettiness, the Trump administration has refused to defend the federal law and has sided with those who’d rather see people with pre-existing conditions fend for themselves.

I’ll say it again: This is a stupid and expensive way of trying to insure Americans, who already pay twice as much for healthcare as people in other developed countries.

It’s not rocket science. Insurance has been used to hedge against risk since the Middle Ages. We know how it works and we know how it works best.

David Lazarus is an award-winning business columnist for the Los Angeles Times, focusing on consumer affairs. He also appears daily on KTLA-TV Channel 5 and is a part-time radio host. His work appears in newspapers across the country and has resulted in a variety of laws protecting consumers.